The Tax Cut and Jobs Act of 2017
***THIS POST CONTAINS AN UPDATE AS OF WEDNESDAY, DECEMBER 27, 2017 REGARDING PREPAYMENT OF PROPERTY TAXES***
Wow! It’s been an interesting year, and with no intentions of ending on a boring note! As of this writing, it is being reported that the House and Senate have come to an agreement on the final tax, and the bill is expected to be approved and signed into law before year-end. This will be the most significant tax reform since 1986, before I even started my career, and impacts taxpayers at every level.
The promise of a simplified tax code has resulted in quite the opposite happening, at least in my practice. With that in mind, I will be focusing on things you can do for the 2017 tax year before the year ends, and then moving on to what to plan for in 2018 and forward.
Summary of Changes Affecting My Clients
There are thousands of news sites out there that explain the tax changes that are expected to be law next week. These changes will not be retroactive to 2017, but will impact future tax planning. A few that I feel are pertinent to my clients are:
· The tax bracket changes. Originally, there were to be four, down from seven. But the new bill preserved the seven brackets, and reduced the percentage of tax and earned income spread. How this will affect you is a big TBD, as it is any year, really. However, mostly my higher-income earner clients will see the most bang for their tax bucks.
· Elimination of certain itemized deductions. Only medical expenses (once exceeding over 7.5% of income), state income and property taxes (with a limit of $10,000 combined deductible), mortgage interest (limited to loans less than $750,000) and charitable deductions have survived. Unreimbursed business expenses (not to be confused with those who deduct self-employment business expenses) have been eliminated as deductions. This specifically impacts my flight crew and other clients with significant unreimbursed business expenses in a BIG (and BAD) way. Also, included in this eliminated deduction are fees paid to me and your fee-based investment advisor.
· Elimination of the personal exemption. Currently, most of us can further reduce our income by personal exemptions. Depending on your income bracket, every person listed on your return reduces your income by $4,050. A family of four reduces their income by $16,200. This extra deduction is eliminated after 2017.
· Lower tax burden on pass-through businesses. Many of my clients are self-employed, either as sole proprietorships, LLCs or S-Corps. While the words “lower tax burden” are appealing, the reality is that most small business will not qualify for the special tax treatment. If you are in a personal service industry, such as an attorney, engineer, doctor, accountant, consultant or “other personal service provider”, the special tax treatment will not apply to you. We will be waiting to see the final list of excluded service industries, but in the meantime, for most of you, it will be business as usual. In addition, the IRS will be implementing measures that prevent abusive practices for those attempting to qualify for the special tax treatments. READ: UPTICK IN AUDITS.
· Elimination of alimony as a deduction, and as income. The new bill will remove the deduction for alimony paid by the payor, and the amount as income by the payee.
· Elimination of moving expenses. There will no longer be a deduction for these expenses.
· Alternative Minimum Tax. A very complicated and annoying tax was slated to be eliminated. But sadly, it will remain. This tax, known as AMT, reduces your deductions so that you pay a minimum amount of income tax on your income. It normally effects taxpayers with moderate to high income with a disproportionate amount of itemized deductions, as well as other factors.
· Education incentives preserved. This includes the tax credits for education.
· Capital gains exclusion on primary residence preserved. Live in your home for two of five years, make less than $250,000 single/$500,000 married filing joint, and you can exclude those capital gains from your income.
2017 Tax Savers
So, what can we do in 2017 that will save us some tax dollars? Here are some ideas:
· Defer income. If you are expecting a large bonus or commission check, try to have it paid out in 2018. With the new tax rates, you may save a few dollars.
· Max out your 401k/403b contributions through your employer before year-end (year-end timing not applicable to self-employed)
· Offset capital gains with any losses you (or your investment advisor) can find.
· Moving for your job? Before year-end would be the time to do it. If you are moving over 50 miles away to start work for a new employer, try to make that happen before the year ends so you can deduct specific moving expenses in 2017.
IF YOU ITEMIZE:
· Prepayment of your Q4 estimated state taxes. If you are set up for estimated payments, and you itemize, pay them before December 31st.
· Same goes for your real estate taxes. If you can prepay your first installment before the year-end, you will be able to deduct them this year when they may make a difference in your tax. ***UPDATE AS OF WEDNESDAY, DECEMBER 27, 2017***
· Unreimbursed business expenses. If you are needing that computer for work, and your employer isn’t reimbursing you, do it this year instead of waiting for next. Again, this is helpful if you itemize your deductions and can deduct your unreimbursed business expenses (subject to a 2% floor of your income).
· Prepay your mortgage interest for January in December.
· As always, charitable giving always helps.
LET’S TALK ALTERNATIVE MINIMUM TAX (AMT) FOR A MINUTE. The prepayment of your state and real estate taxes may seem like a great tax saving strategy for 2017, but remember, one of the big triggers of AMT is this very deduction. A good way to figure out if this is for you is to look at your 2016 tax return. Is your income for 2017 similar to 2016, or higher (line 37)? Did you itemize (line 40)? Did you pay AMT (line 45)? If you can answer yes to any of these questions, the deduction for your state and real estate taxes may be limited. Therefore, prepaying these taxes may be irrelevant.
Planning for 2018 and Beyond
As you know, tax season is always chaotic for us at Taxlink. It’s the nature of the business, and we are familiar with the pressure and working in the shadow of the deadline. This year will be no different. Our first priority is to get your 2017 tax return filed by that deadline. We asked that you provide us with your tax documents as soon as possible. DO NOT DELAY!
My goal is to provide you with a written summary of tax guidance for the coming year along with your completed 2017 tax return. I ask that we hold off any specific tax planning until after tax season, where I can open up my schedule and meet with you personally to discuss how these changes will affect you.